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Introduction to Internal Audit

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Title: Introduction to Internal Audit


1
NORTHERN INDIA REGIONAL COUNCIL OF THE INSTITUTE
OF CHARTERED ACCOUNTANTS OF INDIA
REPORTING REQUIREMENTS OTHER THAN CARO, 2003
  • Vinod Jain, FCA, FCS, FCWA, LLB, DISA
  • Former Central Council Member, ICAI
  • Mobile 98110 40004
  • E mail vinodjain_at_inmacsindia.com

2
Reporting Requirements
Reporting Requirements
Statutory Requirements
Auditing Assurance Standards
Statement of Qualifications in Auditors Report
3
Statutory Requirements
Statutory Requirements
Companies Act
Banking Regulations Act
IRDA Regulations
Others like SCRA, Electricity Act
4
Statutory Requirements - Companies Act
Companies Act
Section 227(1A)
Section 227(4A)
Section 227(2)
Section 227(3)
Report by Auditor
Enquiry by Auditor
In case of negative finding
5
Statutory Requirements- Companies Act
Loans Advances - Whether Secured - Terms
Conditions, not prejudicial
Section 227(1A) Companies Act
Whether Transactions represented by book
entries are not prejudicial
In case of Company other than investment or
banking Company- Securities sold below the
purchase price
6
Statutory Requirements- Companies Act
Whether Loans Advances - shown as deposits
Section 227(1A) Companies Act
Whether personal expenses charged to revenue
account
Whether cash received in respect of allotment
if not, whether position is B/S not misleading
7
Statutory Requirements - Companies Act
State of Affairs
True Fair View
Section 227 (2) Companies Act
Profit or Loss
8
Statutory Requirement-Companies Act
He has obtained necessary information
explanations
Proper books of account has been kept
Report of the Branch Auditor received and how
dealt with

B/S and P L A/c comply with accounting
standards
B/S and P L A/c in agreement with the books
of Account etc.
Section 227(3)
Cess payable u/s 441A has been paid, if not,
amount not paid
Disqualification of director u/s 274(1)(g)
Adverse comment in thick type or italics
9
Books of Account Section 209 of Companies Act
  • Every company shall keep at its registered office
    proper books
  • If not at registered office, notice to RoC
    within 7 days in From 23AA
  • Accrual basis of accounting is mandatory

10
Compliance with AccountingStandards - Section
211(3C)
  • Accounting Standards of accounting recommended by
    ICAI as may be prescribed by the Central Govt. in
    consultation with the National Advisory Committee
    on Accounting Standards
  • At present Accounting Standards issued by ICAI
    are the Standards referred to in section 211(3A)
  • Accrual basis of accounting is mandatory

11
Adverse Comments - In thick type or italics -
Section 227(3e)
  • Observations of Auditor which have any adverse
    effect on the functioning of the company needs to
    be given in bold or italics.
  • No definition of phrase adverse effect on the
    functioning of the company in the Companies Act.
  • Any special comments on matter given in section
    227(1A) may be given in bold or italics.

12
Disqualification of Directors - type or italics
- Section 227(3f)
  • Whether any director is disqualified from being
    appointed as a director under section 274(1)(g).
  • Disqualification to be considered ONLY at Balance
    Sheet date.
  • Not applicable where directors are directors in
    PVT. LTD. Companies ONLY
  • Auditor should obtain a written representation
    form the Company as well as Directors.

13
Cess Payable Section 441A of Companies Act
  • Whether the Cess payable u/s 441A has been paid
    and if not, the details of amount of Cess not so
    paid has to be reported by the Auditor.
  • No Rules promulgated so far by the Central Govt.
    in relation to Cess

14
Statutory Requirements - Companies Act
Section 227(4A) Companies Act
Companies (Auditors Report) Order, 2003
15
Auditing Assurance Standards
Report should state that Financial Statements
are the responsibility of the entitys management
AAS - 28 The Auditors Report on Financial
Statements
Report should describe the scope of the audit
16
Auditing Assurance Standards
Report should include a statement that audit
was planned and performed to obtain reasonable
assurance whether financial statements are free
of material misstatement
AAS - 28 The Auditors Report on Financial
Statements
Report should include a statement that the audit
provides a reasonable basis for his opinion
17
Auditing Assurance Standards
Report should clearly indicate the financial
report framework used to prepare the
financial statements and state the opinion on
true and fair view.
AAS - 28 The Auditors Report on Financial
Statements
Report should describe the limitation on the
scope of Auditors work and possible adjustments
to the financial statements, had there not
been limitation on the scope.
18
Auditing Assurance Standards
Limitation imposed by Entity
Limitation on Scope
Limitation imposed by Circumstances
19
Auditing Assurance Standards
Limitation on Scope Qualified Opinion
We did not observe the counting of the physical
inventories as at 31st March, 2005 since that
date was prior to the time we were appointed
auditors of XYZ Ltd. Owing to the nature of the
entitys records, we were unable to satisfy
ourselves as to inventory quantities by other
audit procedures. In our opinion and to the best
of our information and according to the
explanations given to us, subject to the effects
of such adjustments, if any, as might have been
determined to be necessary had we been able to
satisfy ourselves as to physical inventory
quantities, the financial statements give a true
and fair view.
20
Auditing Assurance Standards
Limitation on Scope Disclaimer of Opinion
We were not able to observe all physical
inventories and confirm account receivable due to
limitations placed on the scope of our work by
the entity. Because of the significance of the
matters discussed in the preceding paragraph, we
do not express an opinion on the financial
statements.
21
Auditing Assurance Standards
Disagreement with Management
Inappropriate Accounting Method
Disagreement on Accounting Policies
Inadequate Disclosures
22
Auditing Assurance Standards
Disagreement on Accounting Policies -
Inappropriate Accounting Method - Qualified
Opinion
As stated in Note X of schedule . to the
financial statements, hire purchase sales have
been treated as outright sales by the entity and
contrary to accepted accounting practice, the
entire profit thereon has been taken into
account. This has resulted in the profit for the
year, inventories and reserve and surplus being
overstated by Rs.. In our opinion and to the
best of our information and according to the
explanations given to us, subject to the effect
on the financial statements of the mater referred
to in the preceding paragraph, the financial
statements give a true fair view.
23
Auditing Assurance Standards
Disagreement on Accounting Policies -
Inadequate Disclosure - Qualified Opinion
On 20th December, 2004, ABC Ltd.issued
debentures worth Rs. 50 crores for the purpose of
financing plant expansion. The debentures
agreement restricts the payment of future cash
dividends to earnings after 31st March, 2007. In
our opinion, disclosure of this information is
required by In our opinion and to the best of
our information and according to the explanations
given to us, subject to the omission of the
information included in the preceding paragraph,
the financial statements give a true and fair
view..
24
Qualification in Auditors Report
Subject matter of Qualification
NOT SO MATERIAL to affect the truth and
fairness of whole of accounts
SO MATERIAL that affects the overall truth and
fairness
It is appropriate for the Auditor to express
true and fair view SUBJECT to the qualifications
It would not be appropriate for the Auditor to
express true and fair view SUBJECT to the
qualifications
25
Qualification in Auditors Report
MATERIALITY
NOT SO MATERIAL to affect the truth and
fairness of whole of accounts
SO MATERIAL that affects the overall truth and
fairness
Issue Audit Report SUBJECT to qualifications
Either Adverse Opinion OR Disclaimer of Opinion
26
Materiality
AUDITING ASSURANCE STANDARD - 13 AUDIT
MATERIALITY Information is material if its
misstatement (omission or erroneous
statement) could influence the economic decisions
of users taken on the basis of the financial
information
27
Audit Materiality - AAS 13
Information is Material
IF
Its Misstatement (I.e. Omission or Erroneous
Statement)
Could influence the economic decisions of users,
taken on the basis of the Financial Information
28
Donts in relation to Qualification in
Auditors Report
  • Qualifying Report by reference to a report made
    in
  • an earlier year because all the shareholders may
  • not have access to such reports.
  • The position of advance to M/s PQ Ltd. to Rs. 5
  • crores remain the same as explained in our last
  • Report.

29
Donts in relation to Qualification in
Auditors Report
  • Vague statements, the effect of which upon the
  • accounts is not ascertainable
  • The debit balaces are subject to confirmation
  • OR
  • We have accepted the certificate signed by the
  • Managing Director that stocks are realisable at
    the
  • vale stated in the balance sheet.

30
Donts in relation to Qualification in
Auditors Report
  • Qualification in the Report which do not contain
  • any real objection on the part of the Auditor.
  • No provision for taxation has been made in view
  • of the net loss shown in the profit loss
    account.
  • OR
  • No depreciation has been provided as the factory
  • has not yet gone into production.
  • The above statements are statements of facts only
  • and may be given in notes to accounts.

31
QUALIFICATIONS IN AUDITORS REPORT of CORPORATE
INDIA
32
DABUR INDIA LIMITED 2004-2005 AUDITORS G. BASU
CO.
Notes to Accounts - Schedule P (Note B4) The
Companys investments in the joint venture, M/s
Dabon International Pvt. Ltd. have not been
accounted for in accordance with AS-27 as the
same is being held for disposal in the
foreseeable future. Consequently, no provision is
deemed necessary for diminution in the value of
investments under AS-13. Auditors
Report .subject to Note No. B(4) in Schedule P
, Balance Sheet and Profit Loss Account have
been prepared in due compliances of Accounting
Standards referred to in sub section (3C) of
Section 211 of Companies Act, 1956.
33
SALORA INTERNATIONAL LTD 2004-2005 AUDITORS K.
PRASAD COMPANY
Notes to Accounts - Schedule U (Note No. 7) The
process for ascertainment of impairment of assets
pursuant to AS-28 which is applicable first time
w.e.f. 1.4.2004 is underway. This being the first
year and process requires a lot of exercise and
technical evaluation to arrive at conclusion as
to which asset that may be impaired. No effect
has been given for impairment loss, in the
accounts which will not be material according to
view of technical experts and management
also. Auditors Report .In our opinion the
Balance Sheet, Profit Loss Account and Cash
Flow Statement dealt with by this report comply
with accounting Standards as referred to in sub
section (3C) of Section 211 of Companies Act,
1956 except of AS-28 of Impairment of Assets as
given in Note No. 7 in Schedule U of Notes to
Account.
34
ASSAM COTTON MILLS LTD 2004-2005 AUDITORS SINGHI
CO.
Notes to Accounts - Schedule 14 Note No. IIA
(viii) The Company has not provided interest of
Rs. 510000/- (till date Rs. 1050000/-) on loan
taken from its holding company, Kesoram
Industries Ltd. for the year ended 31st March,
2005.
35
ASSAM COTTON MILLS LTD 2004-2005 AUDITORS SINGHI
CO.
Auditors Report .Attention is invited to Note
No. IIA(viii) of Schedule 14 of Note on Accounts
regarding non provision of interest amounting to
Rs. 1050000/- upto 31st March, 2005 (for the
year Rs. 510000/-) on loan taken from Kesoram
Industries Ltd., had the provision been made in
the accounts, loss for the year would have been
Rs. 2771967/- (as against Rs. 1721967/- shown in
the accounts) debit balance in the Profit Loss
Account would have been Rs. 11767705/- (as
against Rs. 10717705/- shown in the accounts) and
interest accrued and due would have been Rs.
1055688/- (as against Rs. 5688/- shown in the
accounts) . We report that in our opinion and to
the best of our information and according to the
explanations given to us, the said accounts
subject to para ------above, give the
information.
36
JADOONET LTD. 2004-2005 AUDITORS S.S. KOTHARI
COMPANY
Notes to Accounts - Schedule P (Note No.
4) Valuation in respect of accessories has been
made based solely on management estimates,
since, no active market exists for such
inventory. Auditors Report In view of the
absence of active market of inventory, the
valuation of the inventories has solely been
made on the management estimates and hence we
are unable to verify its responsibility (refer
to Note 4 of Schedule P).
37
Thank You
Vinod Jain FCA, FCS, FCWA, LLB, DISA Former
Central Council Member, ICAI Mobile 98110
40004 Email vinodjain_at_inmacsindia.com
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